WHAT IS 'Inactivity Fee'

An inactivity fee is a sum charged to investors who haven't engaged in any buying or selling activities in their brokerage accounts for an amount of time specified by the brokerage.

BREAKING DOWN 'Inactivity Fee'

An inactivity fee is also a sum charged to credit card holders who haven't made any purchases in an amount of time specified by the credit card company. However, because of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, credit card issuers can no longer charge consumers for not using their credit cards. Inactivity charges still apply to some unused or inactive electronic gift certificates, gift cards and general-purpose prepaid cards.

This is not true for investors. One of the ways brokerages make money is from the commissions on trades. When a customer makes infrequent trades, the brokerage doesn't make money from that customer. The brokerage fee can then try to compensate for the lack of commissions by charging inactivity fees. Smaller, passive investors who make a small number of trades are the most disadvantaged by inactivity fees.

Similarly, credit card companies receive a small percentage of the sale each time a customer uses a credit card to make a purchase. When a customer stops using the credit card, the credit card company stops receiving this income and used to charge an inactivity fee as a way to earn money from a customer who did not generate any income for the company otherwise.

Inactivity Fee and the Credit Card Accountability, Responsibility And Disclosure Act Of 2009

Until the Credit CARD act of 2009 passed, credit card issuers could charge consumers for not using their credit cards. When these dormancy fees were in effect, cardholders had to make sure to use their cards periodically to avoid incurring charges. Different issuers had different timeframes for considering an account inactive and assessing the fee. During that period, the best way to avoid an inactivity fee would be to close the account of the unused card. However, this posed a problem to consumers who wanted to have a credit card for emergencies. It was also problematic for consumers who did not want to close a zero-balance account because lowering their total available credit would increase their credit utilization ratio, possibly resulting  in a lower credit score.

The Credit CARD Act largely made dormancy fees illegal but consumers can still be charged if there has been no account activity for 12 months. The issuer must disclose the existence, frequency and amount of these fees conspicuously before the card is issued and must not charge them more than once per month.

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